There are lots of mistakes you can make when paying off your credit card debt. It's in your best interest to do everything you can to pay off the debt promptly as it can cost you interest in the double digits. You should set a goal and come up with a plan to pay off your balance. But after that, it is not just time to relax. There are many mistakes you should avoid so you don’t pay more than you have to. Here are some of the common mistake people make most common errors people make when paying off debt:
1. Not having a budget
If you plan to pay off your credit card debt without a plan in place, there is a high chance that the money you plan to put towards paying off this debt is going to go elsewhere. By creating a budget, you are better able to prevent your money from going to wants instead of needs. First, review your monthly budget and see what areas you can cut costs on. This can be food, clothing, entertainment, etc. Use this extra money and pay off more of your credit card debt instead. Check out some of our articles on creating budgets and saving money here.
2. Applying for a personal loan with a lower interest rate
Do not assume that you can just replace your credit card debt with a personal loan. It is not trading out debts as one might think. If you have $5000 in credit card debt and you pay $400 a month with 17% interest, it will take you 14 months to pay off the debt and you will pay $542 in interest. If you take out a personal loan with an interest rate of 4%, it will take you 13 months to pay off the loan and you will pay $116 in interest.
3. Ignoring balance transfer offers
If you are close to paying off your credit card debt, look up short-term options instead of wasting money on paying interest. If you open a balance transfer credit card, you can save a lot of money on interest as these credit cards come with a lower introductory interest rate for a certain period of time (including transfer fees). These rates will then increase to a higher annual percentage rate after this period of time ends. If you are ready to pay off your credit cards within this time period, you are doing yourself a favor by researching balance transfer offers.
Consolidating your credit card balances could save you a lot of money because of the lower interest rate. It lets you live on a more reasonable payment schedule and avoid late fees.
4. Focusing only on saving money instead of making money
If you have decreased your spending and you still don’t have enough money to pay off credit card debt, consider the amount of money you are currently making. Getting another job or taking up a side hustle to make extra money could help you keep up with your payoff schedule. Bringing in an extra $50 a week makes a big difference. Make sure you have a goal for the money you earn in your side hustle as well as the amount of time you want to dedicate to it. If you have a time frame that you want to do it and an approximate date where you stop, you will be more motivated and less likely to burn out from being overworked.
5. Not asking for any help
If you are overwhelmed by the amount of debt you have, it might be time to as an expert for help. A credit counselor can help you go over your finances, make recommendations, and come up with a game plan to help you improve. They could help you obtain a credit report, organize your credit accounts, develop a budget, and set up a plan to help you pay off your debt. If your debt is temporary but urgent, you can ask the credit card issuer for a break. Credit card hardship programs are designed for people who have an emergency in which they can’t pay off the credit card debt at the moment since the money has to be directed elsewhere. A little assistance can help you temporarily suspend minimum payments and decrease your interest rate.
6. Not remembering the residual interest
Residual interest, or trailing interest, is the interest that accumulates in the time period between your account closing and your payment. If you decide to pay down your credit card debt in full, but you schedule it for a few days later, you will be charged interest on the amount you paid for the number of days in between. It can be a small amount of money, but if you don’t pay the residual interest, interest will continue to accrue on this amount.
Many people make this mistake as they think that they have paid the balance in full and not paying it will result in late fees and decrease your credit score. Instead of scheduling a payment, call your credit card company for the full payoff amount as of the date the issuer will receive the payment. After, monitor your credit card statement for a few months to ensure that the residual interest has been paid off.
7. Losing sight of the future
Paying off your credit debt is important, but your future is also important. If you put all of your money toward credit card repayment, you might be setting yourself up for a lot of financial trouble down the road. In the short term, you might have an unexpected cost come up and no emergency fund to cover the cost if all of the money went toward credit card debt payment. In the long term, you will hurt your retirement savings if you don’t invest early and let compound interest accrue. Even when repaying your debt, you want to think about your life after you make the last payment and keeping up with the strategies utilized to get you out of debt rather than going back to the bad habits that helped you accrue debt in the first place.